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Governance Q&A: Governance considerations in social enterprises

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This column was written with the assistance of Ryan Turnbull, Director of Ethics and CSR, Eco-Ethonomics.

Our charity needs to start a social enterprise to fund programs operating at a deficit. Do we need to replace the board with business people?

The board is still governing the whole organization, and should reflect the diversity of skills and knowledge needed for that purpose. A good nonprofit board would likely have some business people, but not just business people.

A nonprofit board’s first role is still to articulate what kind of world the organization seeks to create, with what ethical values, and then determine the role of the organization in working towards that better world. Once the board has set direction, its primary function, it is responsible for ensuring the resources needed to fulfill the chosen role. Social enterprise can be an effective mission based activity with the potential for improving an organization’s overall sustainability and autonomy. This largely depends on the model, the market and how effectively the social enterprise is managed.

Are commercial strategies right for you?

There isn’t even a common definition yet for social enterprise, but it involves entrepreneurial efforts in support of social good, with all profits or surpluses reinvested for societal purposes.

The board needs to consider the organizational values and culture. An organization with a strong advocacy role might find running a business harms its ability to speak on economic matters. An organization that operates on careful dialogue that continues until 100% consensus is reached is likely not willing to adopt the quick decision-making style that a business model demands. An organization serving small business owners needs to avoid competing with its members. Common feasibility factors include overall SE readiness, skills and competencies, mission “FIT”, risk tolerance, timing and board support.

Jane Jacobs outlined in Systems of Survival the fundamental differences in the values of public good organizations (government and nonprofits) and of the marketplace. In some cases, she saw the values as opposite and irreconcilable in a single decision-making approach. The new reality is a continuum not an either-or, but individuals asked to operate in both spheres within a single organization will be under considerable stress, no matter how much they want to generate the new revenues the mission needs. Organizations that choose to operate SEs within a nonprofit need to recognize the stress, and provide support and new ways of operating, which are noted later in this column.

Choosing revenue strategies

If the values and culture do not preclude social enterprise, move to analysis of revenue generation options, both traditional and innovative. Many organizations are looking to add social enterprise to their mix of strategies because the potential for unrestricted new revenue is very large. Since the term SE is new and poorly understood, it is to be expected that many nonprofit board members and staff will be uncomfortable. Many business people are still uncomfortable with corporate social responsibility and it’s been around much longer.

A dialogue is needed to objectively consider the potential risks and rewards of each type of revenue generation, and find the right mix, taking organizational, social and business elements into account. Your organization may wish to seek out a facilitator who understands the social enterprise landscape, but who also recognizes social enterprise may not be right for every organization.

Asset mapping can be very helpful. What are the organization’s strengths? Is it already known for high quality resource material it can sell for significant profit? Does it have a very loyal donor group, including a number that will likely increase their giving and make bequests? Does it have facilities and programs that could be adapted for the open market instead of just a restricted client list? Does it already charge significant fees for service? Does it have enough in reserves to use as seed money to get an social enterprise? Does it have a high profile in the community?

Do a risk assessment for every type of revenue generation. Perhaps the charity depends on government contracts, but the government is opening the competition to for-profit providers, or seeking much more evaluation data than the organization has collected. Board members can quickly lose their comfort level with traditional sources when well informed of emerging issues. Senior management can provide advance analyses on both assets and risks to enhance the board discussions. It is also important to assess social risks in addition to financial and organizational risks, as most nonprofits exist to stabilize and improve the lives of vulnerable or marginalized groups. You will want to make sure your social enterprise does not have the opposite effect in practice.

With only few exceptions, most social enterprises have self-sufficiency as a long-term goal, which means they require considerable investment of time, energy and financial resources. This means that organizations that are already on uneven ground should not undertake more risk with the hope of an immediate return. SE is not a quick fix or silver bullet for financial instability. It typically takes 3-10 years for a social enterprise to become sustainable. There are exceptions but they are few.

Likewise, organizations going through a major transition in their organization may want to postpone starting an enterprise as starting a business will surely add to the level of stress on staff and management. There are funding sources that will support your social enterprise startup with technical assistance grants typically for feasibility or business planning. Securing a grant for this work can help to mitigate financial risk and do the appropriate thinking necessary before diving in.

Governance changes if you choose social enterprise

If your existing board is lacking in people who can interpret feasibility studies and business plans well, you probably want to make that skill area a priority for the next board recruitment. Add some education for continuing directors too. If your board is very slow at decision-making, you need to change that, perhaps involving a smaller board and different committee structure.

You can create a new Board Advisory Committee on Social Enterprise, to focus on examining ideas, challenging plans and looking at the skills needed to lead the social enterprise. This group should be recruiting for business skills, particularly in relation to start-ups, and you may need additional business advisors as well to focus on this new cost centre.

A less common strategy is to form a subsidiary, perhaps with a different board and executive in charge. They can recruit and hire for socially responsible business skills.

One of the major governance changes that most boards will have to lead and provide direction on is more stringent and rigorous financial oversight. The board should require a separate financial statement of the social enterprise on a monthly basis. This should breakdown into major expense lines, sales and other forms of revenue, providing a net gain/loss total. Financial reporting is used to help hold the organization, its management accountable and proactively manage risk on a regular basis. This is imperative for running a successful social enterprise and should be balanced with expectations at the board level moderated by the financial realities of running a social enterprise.

Overall, the board needs to change enough that it can competently consider the full range of possibilities and make wise choices. Individuals who stubbornly cling to the past without acknowledging new options are not assets. Neither are people who refuse to attend board education sessions to learn more about the new economic possibilities. But the board also does not need those whose passion is to jump on every new thing without weighing the possible downsides. Such personal characteristics can only be determined through engagement and personal conversations. You can’t tell by age or background which people will embrace new possibilities and apply good judgment.

Since 1992, Jane Garthson has dedicated her consulting and training business to creating better futures for our communities and organizations through values-based leadership. She is a respected international voice on governance, strategic thinking and ethics. Jane can be reached at jane@garthsonleadership.ca.

Because nonprofit organizations are formed to do good does not mean they are always good in their own practices. Send us your ethical questions dealing with volunteers, staff, clients, donors, funders, sponsors, and more. Please identify yourself and your organization so we know the questions come from within the sector. No identifying information will appear in this column.

To submit a dilemma for a future column, or to comment on a previous one, please contact editor@charityvillage.com. For paid professional advice about an urgent or complex situation, contact Jane directly.

Disclaimer: This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.

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